Why Waiving Off UP Farm Loans is a Bad Idea, Nevertheless... - Vivek Kaul's Diary
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Why Waiving Off UP Farm Loans is a Bad Idea, Nevertheless...

Mar 22, 2017

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In the run up to the assembly elections in Uttar Pradesh, the Bhartiya Janata Party had promised that it would waive off crop loans taken by the small and marginal farmers of the state.

Political parties promising to waive off crop loans is nothing new. Before the 2009, Lok Sabha elections, the Congress led United Progressive Alliance government had carried out a similar exercise.

The question, as always, is how much is it going to cost and where is the money going to come from? The State Bank of India in a research report expects the cost of waiving off crop loans to small and marginal farmers to come at around Rs 27,419.7 crore. How have they arrived at this estimate? The total loans given by banks to the agriculture sector in Uttar Pradesh stands at Rs 86,241 crore.

As the SBI report points out: "According to RBI data (2012), 31% of the direct agriculture finance went to marginal and small farmers (landholdings upto 2.5 acres). Taking this as a proxy for Uttar Pradesh as well, approximately Rs 27,419.70 crore will have to be waived off in case loan waiver scheme is implemented for the small and marginal farmers for all banks (scheduled commercial banks, cooperative banks and primary agricultural cooperative societies)."

The SBI estimate suggests that the loan waive off will cost around Rs 27,420 crore. The banks which had given these loans will have to be compensated for this waive off. The union agriculture minister Radha Mohan Singh in a series of tweets on March 17, 2017, made it clear that the union government wasn't picking up the tab. In one of the tweets he said that, if any state government waives off the loans of small and marginal farmers using the state treasury, the move should be welcomed. Hence, from the looks of it, if the loans are waived off, the Uttar Pradesh government will have to pick up the tab.

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Take a look at Figure 1. It shows the fiscal deficit of the Uttar Pradesh government over the years. A government is said to run a fiscal deficit if its revenue is less than its expenditure. This difference the government makes up through borrowing money.

As can be seen from Figure 1, the fiscal deficit of the state has risen at a much faster pace than its gross domestic product over the years. While, the state GDP has jumped by 59.3 per cent between 2011-2012 and 2015-2016, the fiscal deficit has jumped from 2.13 per cent of the state GDP to 5.57 per cent of the state GDP, at a much faster pace.

Figure 1:
Year Gross Fiscal Deficit State GDP at current prices (in Rs crore) Fiscal Deficit as a percentage of GDP
2016-2017* 49,961 12,36,655^^ 4.04%^
2015-2016** 64,317 11,53,795 5.57%
2014-2015 32,513 10,43,371 3.12%
2013-2014 23,680 9,44146 2.51%
2012-2013 19,240 8,22,903 2.34%
2011-2012 15,430 7,24,049 2.13%

*budget estimate
**revised estimate
Source: /or GSDP, the RBI's Database on Indian Economy.
For deficit, budget.up.nic.in and RBI Reports on State Finances
^Source: www.business-standard.com
^^ Calculated on the basis of 4.04 per cent and Rs 49,961 crore fiscal deficit estimates.

In 2016-2017 which is the current financial year, the fiscal deficit of the state government is expected to be at 4.04 per cent of the state GDP. In absolute terms it was expected to be at Rs 49,961 crore. If the Uttar Pradesh government waives off the loans during the course of this financial year, then the fiscal deficit in absolute terms would shoot to Rs 77,381 crore (Rs 49,961crore plus Rs 27,420 crore of the waive off), assuming that expenditure and revenue assumptions made at the beginning of the year, hold true. This works out to 6.26 per cent of the state's gross domestic product and is a really high figure.

So, the question is can Uttar Pradesh government afford this? The answer clearly is no. Can the union government in Delhi afford it? The answer is yes. Rs 27,420 crore is not a large amount for it. But if it goes ahead and finances this write off, similar demands will be raised by other states as well. And given that the Bhartiya Janata Party governments now govern large parts of the country, it will be very difficult for the union government to say no.

Over and above the one-time cost to the state government, there is also the question of moral hazard. The economist Alan Blinder in his book After the Music Stopped writes that the "central idea behind moral hazard is that people who are well insured against some risk are less likely to take pains (and incur costs) to avoid it."

This basically means that once the farmer sees a loan being waived off today, he will wait for elections in the future for the newer loans he takes on to be waived off as well. Essentially, he will see little incentive in repaying loans that he takes on in the future.

As the SBI Chairperson Arundhati Bhattacharya said recently: "We feel that in case of a (farm) loan waiver there is always a fall in credit discipline because the people who get the waiver have expectations of future waivers as well. As such future loans given often remain unpaid... Today, the loans will come back as the government will pay for it but when we disburse loans again then the farmers will wait for the next elections expecting another waiver."

All this makes tremendous sense. But given that we live in the age of whataboutery, you, dear reader, may comeback and ask us: "But what about the fact that banks have written off lakhs of crore of loans that they gave to corporates? If they can do that, why can't they waive off Rs 27,420 crore?"

This is a very good question for which I really don't have a straightforward answer. In situations like these I suggest, dear reader, that you read George Orwell. As he famously wrote in the Animal Farm: "All animals are equal, but some animals are more equal than others".

The point is that if there is a moral hazard for the farmer, there is also one for the corporates.

For today, we will leave it at that.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "Why Waiving Off UP Farm Loans is a Bad Idea, Nevertheless..."

Shridhar Ojale

Mar 26, 2017

27000+ cr. Rs.Loan by SBI

01 Is it fresh disbursement or RENEWAL of old loan.
02.How many farmers are covered under this Crop loan.
03.Average / Range of loan per individual Rs.in thousands.(Any portion of earlier rescheduled loan.)
04.Relavant fig. for earlier year data.
05.Which is major crop for which loan was taken by farmer.
06. Paddy , wheat , cotton ??
unless this data is tabulated and available and the portioned of loan amount insured any waiver of loan amount.the waiver benefit can not be analysed properly.
Hope major portion of this amount of loan waiver will go to Insurance company...
Any comment without studying this is useless, & needs to be ignored.
Economics and ideology both are important for pragmatic evolution.
Shridhar Ojale

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KD

Mar 23, 2017

When you are in India, you should stop talking about logic. Otherwise, your head will explode. In GST regime, tobacco / liquor will be taxed at lower rate than diesel and petrol. Is there any logic to it. Whole automobile sector is suffering because of this. But, who cares?

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sundaresan

Mar 22, 2017

govt should take all round expertise to support the farmer to allivate the hardship faced by farmers,

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Anoop

Mar 22, 2017

Another incisive article Vivek. You indeed have a knack, and have brought out a significant fact. Given that anything that any state or central government spends is actually out of the taxes it earns (for lack of a better word), do the citizens have absolutely no right or say on where it should be spent? I understand, you cannot seek an opinion poll from 1.3 billion already highly divided individuals, implying you just can't challenge it. Theoretically you can, but with crores of litigations languising in the courts already, chances of your being heard are miniscule. So, as a citizen you are literally damned. That's what it is - isn't it?

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manmohan khetan

Mar 22, 2017

Pl use this column for relevant topic. Its a paid services. Not meant for collecting signatures for individual opinion. Its extremely annoying to see this kind of pop messages

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